On Tuesday, Sept. 22, Microsoft Corp. (MSFT, Financial) unveiled its plan to offer a new service called Azure Orbital, which will connect the satellites of customers to its cloud computing network.
This kind of service, called "ground station as a service," aims to rent ground station capacity to satellite owners who do not have the resources to build their own ground station networks around the world. Even a single ground station is a costly venture, and in order for a satellite to provide top-quality data services to clients, the company needs access to quite a few of them around the globe.
Shares of Microsoft rose about 2% following the announcement before declining 3% to trade around $200.59 the following day.
While ground station as a service is not the newest development – companies such as Kongsberg Satellite Services and The Swedish Space Corp. have been offering it since the 1960s – Microsoft will become only the second company to offer the service in integration with its own extensive cloud infrastructure and applications. The first was Amazon.com Inc.'s (AMZN, Financial) Amazon Web Services Ground Station, which became available to the general public in May of 2019.
Microsoft's entry into this space marks the beginning of a competitive landscape for offering easy-to-use ground station services. The competition for space in an industry that Amazon previously monopolized could be essential to the healthy development of options for a growing number of customers, in addition to giving Microsoft a leg up in the race for cloud infrastructure market share.
Azure Orbital
The Azure Orbital service will soon begin as a private preview for select Microsoft customers. The full-managed ground station as a service network will enable customers to communicate, downlink and process data from their satellites and other spacecrafts on as a pay-as-you go basis.
Microsoft outlined its intent for the project in documents filed with the Federal Communications Commission earlier this month, and the FCC has authorized proof-of-concept demonstrations.
Yves Pitsch, a principal product manager at Microsoft, wrote the following in a blog post about the topic:
"With access to low-latency global fiber networks and the global scale of Microsoft's cloud services, customers can innovate quickly with large satellite datasets. The cloud is central to both modern communications scenarios for remote operations and the gathering, processing, and distributing [of] the tremendous amounts of data from space."
Microsoft has signed on satellite companies Amergint, Kratos, Kongsberg Satellite Services (KSAT) and Viasat (VSAT, Financial) as partners for the project. The KSAT partnership will give Azure Orbital access to over 200 antennas at two dozen sites around the world. A partnership with SES Networks will provide communication services. SES Networks plans to co-locate the gateways for its next-generation satellite constellation with Azure Orbital, with CEO John-Paul Hemingway commenting, "This one-hop connectivity to the cloud from remote sites will enable our MEO [medium Earth orbit] customers to enhance their cloud application performance."
For the first stage, Microsoft plans to build six orbital ground stations around the world, most of which are already works in progress. For comparison, Amazon currently has six orbital ground stations, having delayed its plan to have 12 operating by the end of 2019 due to realizing that its assumptions about the best placements for the stations were not in line with what customers wanted.
The market for "easy-to-use" ground station networks
The costs and other barriers to entry for satellite launches and extensive cloud infrastructure continue to lower as the demand for these products increases. Five years ago, it cost approximately $50,000 to send one kilogram into space, but in 2020, the cost has dramatically decreased to around $2,000 to $3,000 per kilogram.
Lower barriers to entry mean that the market for "easy-to-use" products within the industry will see higher growth, potentially even surpassing the growth rate of the industry as a whole. Azure Orbital aims to fall into this category alongside AWS Ground Station. This is also why many older players who have been renting out ground station capacity for decades are finding it profitable to form partnerships with Microsoft for the Azure Orbital project.
One of Warren Buffett (Trades, Portfolio)'s most famous investing principles is "Never invest in a business you cannot understand." This applies to purchasing products and services just as much as it applies to investing. The easier it is for a customer to understand what is being offered, the more likely they are to purchase it.
Of course, lower barriers to entry for customers also typically means lower barriers to entry for new competitors. However, it still seems unlikely that many new players will be able to enter this "easy-to-use ground station service and integrated cloud infrastructure" market anytime soon, as the resources needed to undertake such a large-scale project are enormous.
Industry growth and market share
According to a report from technology industry research company Gartner, Microsoft held an 18% share in the cloud computing market as of the end of 2019, while Amazon held a 45% share.
Azure Orbital could give Microsoft's cloud business a leg up in the long run, as it introduces an alternative to AWS Ground Station for new customers. While it's still too early to tell what advantages (if any) Microsoft's offering will have over Amazon's, the company as a history of quality products and cutting-edge technological development, so it should be able to take some market share for itself. At the very least, Azure Orbital will almost certainly be the choice for existing customers who use Azure.
In the next four years, the satellite ground station equipment market is expected to grow at a compound annual growth rate of 7%, according to a study conducted by U.K.-based research company TechNavio. Meanwhile, the cloud infrastructure market is expected to achieve a compounded annual growth rate of 17.5% over the next five years, with the highest growth being in the Asia-Pacific region. Introducing Azure Orbital and AWS Ground Station near the beginning of a phase of exponential industry growth ensures that both Microsoft and Amazon will already be well-established in terms of ground station services when larger numbers of new customers begin looking for quick and easy options.
Valuation and conclusion
Microsoft's unveiling of Azure Orbital is a good sign for both the growth of the ground station services industry as well as industry diversification, since new customers who have relatively little knowledge about how the technology works will have another option aside from AWS. This should allow Microsoft's existing customers to get their satellites in the air and connected faster and help facilitate a more competitive environment for faster innovation.
Unfortunately, in terms of valuation, much of Microsoft and Amazon's future earnings for the next couple of years have already been priced into the cost of their shares due to strong bullish sentiment in the U.S. stock market. As beneficiaries of the pandemic accelerating the pace of cloud adoption, both companies have seen shareholder enthusiasm soar, especially as bonds and many other low-risk investments have lost virtually all of their profitability.
According to the GuruFocus Value Line, Microsoft is significantly overvalued, as the intrinsic value is not expected to catch up with share prices over the next few years. Meanwhile, Amazon is considered to only be modestly overvalued, as analysts predict its earnings to nearly double over the next three to five years.
Investors may thus want to wait for a pullback for either stock, especially Microsoft, though of course there is no way to predict when such a pullback would occur.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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